Wednesday, October 20, 2010

Australia will pay the price of Queensland's asset sales

The Queensland Government furniture firesale continues as they soften the market for the crashlanding of QR National. In one of the first major share offerings since the GFC, the rail freight business is being pitched as a “growth story” for which they hope to get somewhere between 6.6 and 7.8 billion dollars. Bligh acknowledges dividends will be low and investors will not make a quick killing. What she does not acknowledge is that this slow long-term growth behaviour makes it ideal to remain in government hands.

There is another reason the sale is bad. Privatisation of any enterprise costs money and the cost is deducted from the sale price, effectively meaning the vendor pays for the transition. Australian and Queensland tax payers will also lose tens of billions in long term revenues.

In the case of QR National, the "book value" of the company is $7.4 billion which puts it in the ballpark of a fair price. But the book value does not measure other aspects of the company value including future earnings, goodwill and the power that comes from being the leading producing of freight services in Australia. It too must be in the billions of dollars.

QR National is the biggest of five assets to be disposed as Queensland buckles under financial penalties caused by its AA credit rating. With $52b of debt to service, international credit demanded these tasty morsels be released in downpayment. The unfolding financial disaster left Bligh was in a no win situation after her election. The only people that wanted these assets privatised would never vote for her. Her base detested the move and her credibility was shot to pieces after she introduced the sale without a mandate in the 2009 election.

These are not trivial items. QR National is huge. They are the largest rail freight haulage business in Australia by tonnes hauled and are particularly strong in coal haulage which has doubled in ten years. QRN operate 2,300 of dedicated railway lines across five states. Their future outlook is strong having invested $3.4 billion in three years keeping its rolling stock up-to-date while expanding its network. Another $3.8b is earmarked in expansion programs in the next two years.

QR National may be the jewel in the crown but the other four assets are also sparkly. Queensland’s largest cargo port, the Port of Brisbane could fetch up to $2 billion. Queensland Motorways operates the tolling franchise on the Gateway and Logan motorways and is worth about $4.5 billion. But as Professor Ross Guest told RACQ a likely sale price of $3 to $4b “would therefore transfer net worth from Queensland taxpayers”.

The fourth item up for grabs is Australia’s most northerly coal port: Abbott Point Coal Terminal. Abbott Point is 25km north of Bowen and is the quickest coal route to China. The port is also valuable because there are few other locations along Queensland's eastern seaboard where very deep water is so close in-shore. Whitsunday Regional Council Mayor Mike Brunker said the terminal might go for half its $3 billion asking price because of crucial missing links in the railways that provide coal to the port.

The fifth asset is a 99-year licence for Forestry Plantations Queensland and it is already lost to the state. The smallest of the five, it was the ideal candidate to be first cab off the privatisation rank. The licence to manage, harvest and re-grow plantation timber on over 200,000 hectares of plantation lands was sold for $603 million at the end of June to American company Hancock Timber Resource Group. The price shows exactly how much privatisation costs.

Professor Gary Bacon, adjunct professor with Griffith University's Environmental Futures Centre, said the state's forestry assets appeared to be going at bargain basement prices. He said if the land remained in government hands, the right to grow and harvest trees on it would be worth an estimated $1370 million. This higher figure came from parliamentary research commissioned by Bruce Flegg and while it is politically motivated, it shows a loss of $767m on unrealised earnings for the state. There are also environmental concerns. Hancock Timber Resource Group are the target of Greens' ire over their Victorian operation which will clearfell much of the Strzelecki Ranges.

The QR National sale is likely to dwarf the Forestries sale in scale, impact and likely money lost forever to the state. In parliament on 7 October, Queensland Treasurer Andrew Fraser called the QR National share offer a “historic moment for QR, for Queensland and indeed for the nation.” Apart from failing to recognise the impact of the GFC, it was this curious phrase “indeed the nation” that made it suggest Australian interest was an afterthought with the sale.

This is a major blunder given QR National’s size and reach into the important NSW market, a state which will recover its crippled mojo when the hopelessly compromised Labor administration is turfed out of power in 2012. The Queensland Government is expecting to receive something between about $3.6 billion and $5 billion in proceeds from the float, but once again the true value of future earnings is not included. Bligh is aware of all of this but has no option but to press on. Her fear of bankers appears worse than her fear of voters who don’t want the sales to go ahead. This death wish suggests she has little choice in the manoeuvre.

The coded message for help in the Queensland Government’s spiel appears in the very name of the new entity “QR National”. Its sale means billions of dollars will be lost to Australia. If Bligh is unable to act in a notional national interest, then Prime Minister Julia Gillard ought to. She could buy the remaining assets for the cost of about a tenth of a stimulus package.

Tens of billions are leaving the Queensland economy which will not be compensated by the benefits of privatisation. Stephen Bartolemeusz in Business Spectator gives the game away when he says the value of QRN is in the privatisation alone. Given the company’s strong set of businesses with dominant market positions it ought to release considerable value. But “against that” he outlines reasons why investors won’t pay premium prices: The grandfathering arrangements to protect jobs, the retention of 25-40 percent Government ownership and a 15pc ceiling on individual shareholding.

It is these political risk management strategies that drives the increase of buying cost, a factor the Federal Government would not have to worry about. What the Feds would have to worry about is being locked out of the “growth story” Bligh is now telling because they will have to deal with the consequences of private ownership decisions on the management of the Australian economy and environment.

Queensland’s troubles is another example why federalism is a mess and is economically unsustainable. If there really is a new paradigm in Canberra, it should send a message to show how our state-based power structure is crippling Australia. In the “future directions for rural industries and rural communities” session in the 2020 summit two years ago, session chair Tim Fischer admitted their solutions saw them “almost demolishing the states”. It's a worthy vision for 2020 - the quicker it happens the better.